The Bond Market as a Leading Indicator

Markets were down slightly today in lighter than usual volume. The Dow led the day in losses, falling 50.58 points, or 0.31%, to close at 16,279.89. The S&P 500 was down by 3.98 points and closed out the trading day at 1,938.76. The NASDAQ fell as well, losing 3.98 points and closing out the day at 4,752.74.

In overseas trading, the familiar pattern of a struggling Asia and growing Europe kept up. Japan fell by 355 points, while Hong Kong was down nearly 500. In London, markets were up by 100 points, while in Germany the DAX grew by just over 40.

The Bond Market as a Leading Indicator

Most analysts agree that the bond market is a good leading indicator for stocks.

It’s an effective short-term peek into the future in some cases. For instance, when the stock market falls but the bond yields grow, typically the next day will be a recovery for stocks. It doesn’t work in every case, but for the large majority of the time bond yields will predict the general direction of the following day’s market.

When people talk about using the bond market as a leading indicator they typically discuss the yield curve. The yield curve is a graph which compares the fixed interest rate of bonds versus the amount of time they take to mature. In broad strokes, the yield curve can be used to predict a number of different market factors, including the rate of economic growth and thus the chances that the stock market will grow.

Learning how to analyze the bond market yield curve is the first step toward being able to predict market movement using charts and graphs. The yield curve is probably the most important piece of information that analysts use when they make their guesses about how the market will perform in the coming quarter. It’s also useful to predict things like mortgage rates and even consumer spending, although with the Fed still pegged at 0% some of the old rules of thumb don’t apply.

Oil Prices Up Slightly, But Energy Stocks Fall

The futures price for a barrel of crude oil rose slightly today, but energy stocks continued to lead the way in losses. CONSOL Energy (CNX), Southwestern Energy (SWN), and Transocean (RIG) were all big losers today, each falling more than 5% in trading. Autozone (AZO) and PayPal (PYPL) were among today’s big gainers.